Australian Dollar Holds Gains

The Australian dollar held its recent gains to around $0.703, staying at a three-week high as investors assessed the durability of the Middle East ceasefire. The agreement, which includes Iran’s commitment to reopen the Strait of Hormuz, initially triggered a sharp unwind in US dollar safe-haven demand and lifted risk-sensitive currencies. However, optimism is fading at the margins, with reports indicating the 10-point framework has yet to secure full commitment from both sides, leaving the agreement viewed as fragile and incomplete. The conflict, now in its second month, has pushed energy prices higher and heightened inflation risks, reinforcing expectations that global central banks may keep policy tighter for longer. In Australia, the Reserve Bank has already lifted rates by 50 basis points to 4.10% amid persistently elevated inflation. Markets are now pricing in a roughly 55% chance of another hike in May, easing from 70% last week, but see rates at 4.61% by year-end.

The Australian dollar jumped to above $0.707, hitting a three-week high as global risk sentiment improved and the US dollar weakened after US President Trump announced a two-week suspension of military operations against Iran. The move came just before a deadline that would have triggered intensified strikes, with Trump instead announcing a “double-sided ceasefire” linked to Iran’s agreement to reopen the Strait of Hormuz. He also said the US had received a 10-point Iranian proposal that could serve as a foundation for negotiations, with the two-week window intended to finalize a broader settlement. The ceasefire could reshape the inflation outlook, potentially easing pressure on the RBA to tighten policy further. Markets had been pricing a rate hike toward 4.35% or higher at the May meeting, partly driven by elevated energy prices after the Strait’s closure. Still, analysts warned that supply conditions could take months to fully normalize even if a lasting agreement is reached.

The Australian dollar remained weak around $0.690, staying near two-month lows as caution built ahead of US President Trump’s deadline regarding the Strait of Hormuz. Washington set a firm deadline for Iran to reopen the Gulf to shipping or face potential attacks on critical infrastructure if demands are not met. Heightened risks around the closure of the key oil chokepoint have driven energy prices sharply higher and reinforced demand for the US dollar as a safe haven. While hopes for a last-minute diplomatic breakthrough have helped cap further decline, sentiment remained fragile, with traders closely watching the 8pm Eastern Time deadline. Meanwhile, domestic data showed a sharp downturn in activity, with Australia’s S&P Global PMI slipping into contraction in March for the first time in about 18 months. The services index dropped to 46.3 from 52.8, while the composite eased to 46.6, pointing to weaker private sector activity amid geopolitical tensions and rising fuel costs.